How To Use Negative Gearing To Create Wealth - PODCAST EPISODE 1
Listen to the Negative Gearing Podcast
This podcast looks at how you can use negative gearing to create wealth, by purchasing an investment property.
Negative Gearing Podcast Transcript
Introduction
Welcome to the location property podcast, the podcast for property owners looking to grow their property portfolio.
In this podcast, you’ll learn how to put your wealth creation on automatic. So your assets are working for you 24/7 while you’re cruising the Mediterranean in your super yacht.
To access previous episodes, packed with property investment strategies that actually work head over the www.locationpg.com.au/podcast.
What is Negative Gearing?
Hi, I’m Ajay Valanju, the founder and owner of Location Property Group. This is the first episode of the Location Property Group Podcast. You can find out more about us at www.locationpg.com.au.
Today I’m going to speak about negative gearing in the podcast. Negative gearing is critical to wealth creation as it allows us to claim the losses that a property makes against our other income. Which effectively subsidises the cost of owning the property which effectively then subsidises the rent that a tenant pays in order to stay in the property.
Negative gearing is a situation where the expenses of holding an investment property exceed the income, being the rent. That loss we can offset our other income and claim a lower income to the tax office as a result of that. So that’s in essence what negative gearing is.
Negative gearing has been a very important topic for the recent election. The labor party was considering abolishing or significantly altering the way negative gearing works. The liberal party has now won the election so negative gearing seems to be safe for the next 3 years at least.
The reason the labor party want to abolish or change negative gearing is that negative gearing, on the surface, appears to give investors an unfair advantage to investors over owner-occupiers. So, investors are able to claim these losses against their income in order to provide housing. Whereas home buyers are not in such a position. All of the expenses associated with home ownership are not tax deductible if you live in the home.
Why Do We Have Negative Gearing?
It’s important that we understand why negative gearing was initially brought in.
So, going back before negative gearing, there was a lot of pressure on the Australian Government to provide housing for Australians.
The Australian population has always been growing at a fast rate and it is difficult to build houses at a rate to cater for this population growth.
So the Government introduced negative gearing to try and encourage the private sector to build homes, independently of the Government and hence take a lot of pressure off the Government.
And it’s worked very very effectively and it’s been a great success in that the private sector has provided these homes.
Challenges with Negative Gearing
Two of the most common challenges that we have with negative gearing:
Firstly, it’s sometimes quite hard to understand the idea of a property being positive cash flow even though it’s negatively geared on paper.
So, the main culprit for this is depreciation. Depreciation is an expense that we can claim in our income tax return, but it’s not actually an outflow in cash that we pay during the year.
Depreciation, basically, is a loss that reflects the amount that items in the property go down each year as their useful life is consumed.
A great example would be carpets or blinds and curtains. Which say carpet has a useful life for 7-10 years.
So we claim a loss of 1/7th or 1/10th of the value each year and we can claim that in our income tax return.
One of the interesting points with property investment is we claim to the tax office that we are losing money and that the items are depreciating in value, however overall the property has actually grown in value. So it is such a great way to grow wealth over time.
The second challenge with negative gearing is that a lot of us give too much importance to negative gearing and tax minimisation. As opposed to giving importance to actually creating wealth. The reason we invest in property is to build our wealth over time not just to reduce our tax bill. So, it’s very important to stay focused on wealth creation.
Overcoming These Challenges
In terms of overcoming these challenges, firstly with regards to understanding negative gearing.
It’s important to remember depreciation as this is the one that usually causes the problem.
All the other expenses and incomes are cash based. So the amount of rent that the property earns, the amount of its strata levies, the interest bill that we pay to the bank, all of those are exact cash payments outflows and inflows.
Whereas depreciation can muddy the waters in that it doesn’t affect our cash flow but it does affect our tax return. So that’s the important one to understand in negative gearing.
We offer a service, where if you are having trouble in understanding that, you can give us a call and we’d be more than happy to explain negative gearing to you. You can find our contact details on our website.
The best way to overcome the second challenge, of placing too much importance on negative gearing, is to actually sit down with a piece of paper or an excel spreadsheet and list out all the income and expenses associated with the property investment and the expected capital growth as well and make sure that the investment makes sense.
Even without taking into account the tax benefits and negative gearing benefits. So that you know that you are going to actually be making money over time.
With negative gearing, any proposed changes that the Government has talked about have said that the changes will apply retrospectively. Therefore if we buy an investment property today or at any point before these changes come in our property will still have the benefits of negative gearing. So what’s important here, is to make sure that if we are in a position to take on the advantages of negative gearing that we implement them now and before any potential changes.
Actionable Steps
But the action step that we need to take immediately is to get in touch with our mortgage broker or bank manager and get a pre-approval as to how much we can borrow based on the level of income were at. And if we explain to the broker, that its a rental property and that there will be rental income associated with that, that will normally boost the amount that we are able to borrow.
The next step after that is to then start searching for properties which fit within your affordable range.
Books on Negative Gearing
So surrounding the negative gearing topic, there are 3 books that I would recommend listeners to read. 2 of them are from Jan Somers:
the first is ‘More wealth from residential property’ and the second one is ‘Building wealth Story by Story’. Jan Somers is a very successful property investor, she started off as a high school teacher and was able to build a portfolio of over 40 properties in a short period of time.
The third book I would recommend is ‘Wealth for Life’ by Tony Melvin and Ed Chan. This book explores property from a different perspective and really looks at wealth and how to build wealth over time. It’s very different to many property investment books that I’ve read before and I highly recommend it.
Podcast Close
This is our first podcast, and at Location Property Group we intend to record regular podcasts and very good content surrounding property investment. So keep yourself posted and check in to listen to our podcast. You can always go to our website.
I’m always happy to speak personally with listeners, so you can book in an appointment, come in and we can talk about the best way forward with your investment property strategy.
This is Ajay Valanju from Location Property Group, thanks to listening to this episode and we look forward to speaking with you soon.
Podcast Outro
Thank you for listening to the Location Property podcast, the podcast which consistently delivers actionable strategies to property owners who want to automate their wealth. You can access all the information below this episode via the show notes at www.locationpg.com.au/podcast. You can also ask questions in the comments section which Ajay will answer in upcoming episodes. How can Ajay help you today?
